banking_restructuring article of adv acc

8/14/2019 Banking_Restructuring Article of Adv Acc

1/21

ArticleBanking

Restructuring

Submitted By

Muhammad LaraibSP07-BB-0082

ToSir Mansoor Tallat

Advance Accounting


2/21

Muhammad Ali Jinnah University

Banking Restructuring Lessons for

GeorgiaRestructuring: concept, goal and contest. Termini restructuring is of Latin origin and means changing-improvement of the structure of someobject or system, i.e. its forms and consistence (morphology). Itbasically means unchanged character of directions of its functioning.

They use restructuring from large plan in the economical texts mostlywith debts, including foreign ones, payments and taxation (trade)balance, corporation sector of the economy and of separateenterprises, of banking system entirely and separate banks (othercredit organizations).

Its basic elements are:

eradication and minimization of negative influence of bad macro-economic, political and other common factors upon situation andperspectives of functioning of banking system;

improving systemic organization (structure, kinds, types) of totality of credit organizations, creation of conditions for effectiveand civil competition among them;

improving legislative base for mutual-advantage collaborationand organization-economic mechanisms among credit

organizations and their clients; increasing quality of managing entire banking system and its

separate elements; financial cure of separate banks and other credit organizations; effective (with minimal social experiences) liquidation of vital

credit organizations.

Foreseeing these elements, we can state following definition:restructuring banking system in managed process of its globalreadjustment (improvement), supported by changing in industrial,cash, taxation, budgetary and information policy, also in the policy of the banks themselves, and which is directed towards formation of banking system adequate to effective, trustful and dynamicallydeveloped modern requests.

According to this definition, restructuring effective, stabile and healthybanking system in not needed (though, it is possible to improve orreform it). Thus, restructuring is a cure (curing something that is nothealthy), i.e. restructuring may be understood and must be understood
http://www.addthis.com/bookmark.php?v=20


3/21

to be the process, with the help of which banking system of concretecountry transit to the new level of development. It is also evident, thatrestructuring is curing of such systems, which are in crises and can notget out of it without help. Finally, from the point of restructuring(privately displaying necessity of financial curing) we must discuss

absolutely every bank. In this case, restructuring, as a process of readjustment, seems to have its own instrumentation, which will not bebounded only with the instruments of ordinal procedure bankingmanagement?

According to the mentioned above, we can make main goal of restructuring process of banking system - its recovery and taking itsmovement to the relatively new trajectory, at which it already gainsearlier lost potential of progressive development and becomesadequate to the real sector of the economy again.

In relation with this, we must pay attention to the followingprinciple requests towards the context of the process to bediscussed:

activities provided in relation to the restructuring will beprofitable only in case, if we foresee not only reasons of bankingcrisis, but also define those fundamental; defects of economicalrelations, which make banking system viable at the modernstage;

restructuring of banking system, which, in fact, must give rise toits reanimation in the earlier condition, doesn't solve problemsneither of whole system, nor of the country economy;

it is necessary to process not only tactical activities beforestarting the process of restructuring, but also to set strategicobjects: to receive such structure of banking, which will beadequate to the goals and functions standing towards the banksat the new stage;

while processing activities of reforming banking system they mustclearly define a circle of those problems, which must be solved duringthe process of reforming with the help of renewed banking system andthey must set the price of activities;

Effective restructuring requests combined methods of approachestowards the problems. World practice processed principles andmethods of approaches of solving banking crisis, approbation of whichshowed their sufficient effectiveness. It is nonprofessional and notexpedient to use some principles and refusing others;

A process of solving crisis may not be fast, simple or cheap.


4/21

Th8is common goal, mentioned above, in its turn, may be concretedinto the list of those problems, working at which must form realconcept of restructuring process according to the conditions in modernGeorgia:

1. eradication of conditions provoking banking crisis, solvingproblems in relation with banking sphere and real sector;2. financial curing of those problematic banks, which have kept

viability and perspectives of development, also state support of those banks, which have abilities of effective usage of this aid;

3. providing trustful satisfaction of basic current requests on bankservices (payments and short-termed crediting) of the industrialsubjects;

4. foundation of a new, more complete structure of banks and othercredit organizations (according to the forms, measures of theproperty, regional distribution and so on);

5. Creation of more complete rules and instruments regulating newrules of banking activities and of this activities;6. Creation of conditions. Mechanisms and stimuli for turning banks

to the side of enterprises, for their involving into the process of further production, also overcoming inflexibility of the banks inthe process of solving investment problems;

7. Recovering trustfulness among banks;8. Recovering trustfulness in relation with the banking system,

appearing stimuli among population for putting their savings onthe accounts;

9. Creation of the stimuli for increasing responsibilities and

effectiveness of the bank managers;10. Civilly closing of not viable banks and fulfillment of the

mechanisms of their liquidation.

There is an idea about the fact, that main goal of restructuring bankingsystem is recapitalization of the banks (recovering lost a capital and itsfurther growth), but it is not quite correct: since today the hardestproblem is, that a spectra of profitableness and trustfulness of capitalinvestment is very tight.

Some bankers offer such understanding of restructuring and such

pragmatic activities of radical reforming of banking system, theessence of which finally has been brought to the regrouping of thealmost bankrupted banks according to the principles of specialization(specialized banks working in the country scale, banks orientedtowards export or those obligated in the groups of large enterprises,also regional banks). they meant, that new "system forming" groupswould obey to the strict control of appropriate governmental structuresor groups of enterprises, in exchange of it, it will have right for working


5/21

on budgetary resources. Suggestions of separate bankers were notrelated with the problems of recovering whole banking system.

We can form basic problems of restructuring banking system in thefollowing way:

Transiting to the foundation of a healthy market banking system byreadjustment of separate problematic banks, providing structuralreform of banking system;

Increasing whole capital of banks and filling banking system with long-termed resources;

Creation conditions stimulating growth of the quality of marketcommercial banks, including those in the regions.

Main goal of restructuring program must be: creating such layer of technological market commercial banks, which provides marketingpolicy and makes basic profit from credit-operations. It is interesting,that within the bound of 2-3 years program share of such capital in thebanking system may reach up to 30-40%, and credit share in the creditportfolio of banking system - 30%. Share of profit made from creditingin whole income of banking system must not be less, than 6%. Half of such healthy banks must still function in the regions.

The concept of those first steps, which must make foundation to therealization of effective program of restructuring banking system, must

be formed in this way:

1. processing a conception of developing banking system and itstaking as a manual 2-3 years earlier;

2. consisting a program on working at the passed liabilities and itsrealization; We mean that a special state organ working onrestructuring purchases from the banks their "bad money;.

3. realizing recapitalization of the banks. we mean, that the sameor other state organ enters the capitals of the banks for a littletime, increases this capital and credit potential of the banks andthen sells its share in the capitals of the banks;

4. passing the law about guaranteeing deposits of the people in thecommercial banks on time;

5. creating equal conditions for competition and development of every bank. We must refuse other banks "having socialimportance", "forming a system" and somehow "related" withsomebody;

6. clear formulating of the role of government and state banks inthe banking system;


6/21

7. realizing evident support of regional market commercial banks;8. creating effective mechanisms of developing infrastructure of the

banks and their functioning;9. changing a system of taxation of commercial banks;10. processing and realization of activities refinancing

commercial banks by the central bank;11. creation and realization of the package of legislative andorganization activities developing hypothec crediting;

12. fastening the process of transiting commercial banks to theinternational standards of accounting

Restructuring: principles and conditions. We can name following to bethe obligatory principles (main rules) of the process restructuringbanking system:

A principle of solidary obligations. The essence of it is, that in the

mentioned process there participate (with out resources) andcoordinate the banks themselves (in the first place - the owners), theircreditors and the government. It is impossible to restructure bankingsystem without state support. Though, it is evident, that the state willnot be able to support every bank, having extremely reducedresources. Accordingly, the banks in the first place must try to solvetheir problems independently and the managers and creditors of thecured banks must stand on the advantage position.

The principle of minimizing loss and expenses. It says, that whilerealizing restructuring we must consider those activities, which give

the opportunities of overcoming crisis with the less budgetaryexpenses (financial expenses of the society) and with little loss fromthe side of banking system and the clients of banks to be more prior.

Liquidation of problematic banks is much losable, but socially moredifficult way. It needs especially measured method of approachtowards the problems of the depositors the banks to be liquidated. Fastliquidation of not solvent banks may deepen the crisis (an Indonesianexample in 1997-1998). According to the estimation of numbers of experts, best way out of it is confluence of the problematic bank withthe healthy one, though this is quite doubtful recommendation.

A principle of minimizing liquidation requests to give priorities to theactivities of reorganization and support and not bankrupting in theprocess of restructuring and financial curing.

A principle of just distribution of expenses on restructuring mean, thatthe stated part of expenses on curing banks must be compensated bythose, who receive risks related with these banks, are responsible for


7/21

their loss and make profit after restructuring (i.e. participants of thebanks, its highest administration). Economical obligation of not solventmanagers and owners of the banks may be expressed, for example, byadequate reduction of their own banking capital, their participation inthe restructuring process in the way of additional entering in the bank

capitals. Part of the loss may be covered at the expense of thedepositors.

A principle of strategic method of approach means definition of thestrategic problem, what kind of banking system is wanted by thesociety after restructuring (in the condition if it conforms to the newpurposes and functions of the banks at the new stage). Only after thisthey must select advantage and agreed activities, which may berecommended for readjustment of separate banks and its entiresystem.

A principle of complex method of approach means, that a systemdefined by the program must be fulfilled completely. It is impossible tobring whole concept of reconstruction process to its separateconsisting parts (for example, everything mustn't be bounded onlywith solving financial problems displayed in one concrete period of time).

We can name such principles of providing restructuring, astransparency (necessity) of distributing expenses related with it,strengthening management of those banks, which are supported bythe state, encouraging independent adaptation of the banks with the

changed situation and others.

Following conditions of restructuring are also of great importance:

1. Success of reconstructing banking system is in close touch withhow much clearly and knowing affair they formulate long-termedproblems, industrial, structural and financial policy. For example,crediting enterprises, especially of large ones, is possible only inthe case, if it is effective, if it leans upon clear state strategy. It isan important condition without which bank restructuring may notbe successive.

2. For successiveness of restructuring banking system it is the mostnecessary to recover and develop such conception, which willconform to the main economical goals. This conception may beoriented towards fulfillment of objects of operative character(recovering a mechanism of payment, solving other problems).

3. It's not real to try restructuring banking system, apart formreforming and restructuring the surrounding, in which bankfunctions. This request in the first place touched upon real sector


8/21

of the economy and its active enterprises. Banking system is akind of "built" and its successful restructuring is able by knowingwhat the basis is like, i.e. what kind of economy shall it support.Concrete requests and possibilities of real economy are the maincriteria defining, what the banking system must be. Solving

problems of real sector requests advantage economical policy of the state. In every case, real sector and banking system alsoneeds concrete orienteer, which themselves appear to beadditional stimuli of development.

4. Restructuring of banking system must be outrun by curing of money and credit relations. Here curing of money relations mustplay leading role (privately avoiding barter and other cash-free"payments" in the economy). This needs providing activitiesstimulating investments in real sector of the economy, because itis impossible to come out of the economical crisis in other case.

5. Restructuring banking system is impossible without staff

revolution. Specialists of short-termed financial speculationsmust master either modern directions or give the way to thoseprofessionals, who can work with the real sector, haveknowledge and ability in the part of estimating and managinginvestment and industrial risks.

6. Restructuring banking system requests important correcting of legislative and normative base.

According to the mentioned above, we can separate some leadingquestions about restructuring banking system, on which there still is nosatisfying answers.

What was the main reason of the situation, in which the banksappear? It's thoughtful, that we must make choice amongsituation in real economy and peculiarities of bank activities. Weconsider it not to be correct to oppose two reasons to each otherthis way in our concrete conditions.

What must turn into the basic concept of restructuring process(important consisting part)? Managers of central banks givedifferent answers to this central question. There are suchvariants not conforming to each other: 1. financial curing of those problematic banks, which keep viability and perspectives

of development; 2. rising the level of capitalization of the banks;3. curing money relations; 4. recovering not as much of banks,but cash-credit relations; 5. creation functionally new bankingsystem.

What must the structure of banking system be, formation of which is purposeful? This is a principal problem. It is necessary toclear everything related with this. The banks must have an"assortment" if there is no other variant to be received.


9/21

What must a conception of recovering and developing bankingsystem be? Privately, following questions still remains to bedoubtful (more in practice, then in theory): must we considerbasic direction of curing banks their reorganization andreadjustment, which concerns financial and other support and

structural reforming?

Foreign experience of restructuring banking system. Bankreconstruction is not a unique problem. Banking crisis has been noticedalmost in 70 countries during 20 years. A process of recoveringbalance has been continuing very difficultly everywhere and the stateparticipated in them (though, scales of this participation were differentin the different places and periods. Sometimes reasons of the crisiscoincided with each other, sometimes they were specific. But forms of their solving coincided in many cases: stabilizing crediting, filling owncapital of the banks, purchasing their assets (including passed debts)

and others. As a rule, basic financial heaviness leaned upon the statedirectly, or in the way of financing specially founded agencies by it.

USA was a pioneer in the field of banking restructuring, where asystem of guaranteed deposits and a special institute managing thesedeposits has been founded under the influence of the crisis in 1929-1933. This institution was a federal corporation insuring deposits(FCID).Next stage of restructuring banking sphere is related with theseries of banking crisis took place in absolutely different countriesduring last 20 years.

In 1980-1991 1300 banks and 1400 borrowing-saving associationsstopped existence in the USA. According to the different estimations,restructuring banking system cost 300-500 billion dollars (5% of theWIP). In 1995 banking crisis took place in Japan, in 1994-1995 - inFrance, in 1989-1990 - in Australia, in 1987-1989 - in Norway, in 1991 -in Sweden, in 1991-1993 - in Finland, in 1980-1982, 1900-1991 and1995 - in Argentina, in 1990, 1994-1995 - in Brazil, in 1981-1982,1990-1991 and 1995 - in Argentina and Mexico, in 1982-1984 - inChile, in 1994-1995 - in India, in 1994 - in Indonesia, in 1985-1988 - inMalaysia, in 1981-1987 - in Philippines, in 1991-1995 - in Hungary, in1990s - in Poland, Bulgaria, Lithuania, Latvia, Estonia and others. In

some countries systemic crisis used to be repeated periodically. Somecountries were able to avoid systemic basic crisis with the help of having insurance system, in the first place, at the expense of effectivebanking management and regulation.

Price of restructuring banking system is very different: 5% of WIP in theUSA, 10 - in Hungary and Brazil, more, then 40 - in Chile and 55% - inArgentina.Central banks can support problematic banks in the crisis


10/21

situation, especially in case of spoiling their current liquidity. InVenezuela, eight not solvent banks used special lines of liquidity forcompensating money resources. Though, they were not able to coverborrowed sources in the future.

In other cases, crediting is an important step of central banks. They aresupported during banking crisis and give them resources and terms forrestructuring credit organizations. A long termed support provided bythe central bank of Poland is a good example of it, when it purchasedlow profitable shares and long-termed bonds from the banks. Grantinglong-termed credits by the central bank sometimes depends oncreation of complex plans of improving situation by the banks (list of stated activities and expected results).

Reducing the level of obligatory reserves (or increasing percentagepayments on them) is another way of supporting banks, for example,

part of obligatory reserves of deposits poste restates were set free forfinancing purchasing certificates of termed deposits of the institutions,which had been working by the program of restructuring banks.

They use special tax advantages very seldom in the process of bankrestructuring. Notwithstanding this, Brazil used tax stimuli forencouraging confluence: "swallowed" bank could exclude then value of not active credits, "the sallower" received credits equaled to thedistinction between the purchase and balance prices. Some countriesuse tax stimuli for shares and bonds issued during the realization of restructuring program.

They somehow make the rules of regulation and management underthe conditions of restructuring banking system simple. Theycompensate this by creation such middle-termed system of regulationand management (in the crisis period), which foresees risks of bankingactivities more adequately.

To save the banks being in hard position actions provided by the statemay support weakening the feeling of responsibility of the banks. Insuch conditions, the following is of great importance not to give rise tothe weakening encouragement of irresponsible behavior of the banks

in the future. It is considered, that it is necessary to grant a sum formaking large profit and participants of the banks must be responsiblefor their obligations. They requested from the banks to discard acapital partially a conditions for making support in South Korea; thestate obliged itself with bad debts of credit organizations in Mexicoonly in case if its participants used to make additional income; whilebankrupting of credit organizations in Brazil and India, their


11/21

participants were obliged to enter additional sum equal to the size of their initial entering in the nominal fund.

Herewith, participant of the banks are not always obliged with theresponsibilities, for example, in case of the loss received from those

credits, which are granted by banks by the state indications, it isnecessary to range the size of responsibility, as the participants maynot have possibility for solving problems in the credit organizationbecause of the not having transparency and of the organizationcalculations and other reasons.

They founded specialized institutions in the most part of the countriesduring restructuring banking system, which have been obliged with theproblems of managing this process.

A government and central banks of many countries solved problems

with bank crisis and restructured own banking system in differentways. Practice has shown up, that there is neither ideal form of restructuring, nor the universal strategy of normalizing situation inbanking sector. Very often this or that action depends on concreteoccasion. Notwithstanding this, we may separate total signs of successful programs, which have been realized abroad:

the fastest definition of the scales of problems, its recognition on thestate level and readiness of the government for granting importantfinancial resources for solving problems;

passing transparent, activities adequate to the essence of the problem,moving bad assets from the problematic banks off;

processing complex, transparent, operative program, its correct andsuccessive development;

fulfillment of the procedures of banking management.

Chile. A complex of activities. Large scaled restructuring of bankingsystem in Chile has started since 1984, when a central bank of thecountry started granting stabilizing credits for supporting liquidity of

the banks and purchasing their not trustful credits or changing notactive assets on liquidity. Deregistration of the bank debts took placein the way of turning creditors into the shareholders.

State became a guarantor for foreign debts of the private banks. Sizeof the debts transited to the central bank of Chile by the end of 1985overcame whole capital of problematic banks 3 times and consisted 6


12/21

billion dollars (25% of WIP). About 60% of expiated credits werechanged on its bonds by the central bank.

They involved straight state control in numbers of system formingbanks of the country.

Recapitalization of the banks transited under the state control used tobe realized in the way of additional issuing of the shares placed amongsmall and middle investors. A state corporation of supportingdevelopment (CORFO) worked on this program.

Results. The banks practically fulfilled their obligations in the part of the deposits of physical and juridical persons with the help of the usedactivities. Though the quantity of national private banks was reducedfrom 22 to 15, but they were able to keep every large bank andimprove their working by 1987. After 1996 every commercial bank of

Chile has been considered to be competitionable.

The value. By the end of 80s, expenses provided on restructuringbanking system of Chile consisted from 30 to 40% of the country WIP.

Mexico. A complex of activities. Restructuring of banking system inMexico has been started in 1995 after devaluation of national currencyand strengthening of financial situation, which followed devaluation.One of the nominal activities of Mexican bank (main bank of thecountry) was involving special calculation unit UDI (unidades deinversion), which was indexed with the level of prices. Whole assets of

the banks were calculated by it, for avoiding devaluations of creditportfolios of the banks.

Basic organ working on restructuring banks was banking fund of protecting savings (FOBAPROA). During the process of readjustment itexpiated securities from the bank and banks provided deposing of received resources in the Mexican bank. They gave five years to thebanks for expiating these papers. In other cases they were going toconvert them into the shares of these banks and their realization at themarket.

For solving problems with foreign debts of national banks central bankgranted short-termed currency credits from these banks to them, whopassed payment of these obligations. At the same time FOBADROApublished doubtful assets of commercial banks. Herewith, theshareholders, in its turn, were obliged to enter sums equal to the half of resources granted by FOBAPROA. Banks were to enter resourcesreceived from this operation into the 10 year bonds.


13/21

They involved outer management of problematic banks. In some casesthey granted their shares to the foreign banks. At the same time theysupported bank debtors, provided restructuring of their liabilities.

Results. With the help of restructuring Mexico could avoid destroying of

banking system. Deposits of the people practically were not defected. They kept trust of foreign investors in the banks of the country.

The value. Restructuring of banking system of Mexico costs 60-65billion dollars (about 14.5% of national WIP).

Argentina. A complex of activities. State governmental organs inArgentina supported more trustful banks for solving problems of banking crisis. They used differenced method of approach. Theyseparated banks into several groups:

I group Middle and large banks having temporal problems of liquiditybecause of loosing clients. They granted them credits of central bankof Mexico and Bunco de la nacio Argentina;

II group small banks, which were to confluence with large, relativelyhealthier banks or were to be swallowed by them;

III group small banks, which were at the edge of bankrupting. Theystopped operations in these banks and they desired to readjust, selland liquidate them;

IV group 12-15 state banks owned by the administration of Argentinean provinces, which were to be privatized.

Expiation of bad debts was provided not by state agencies, but filelargest commercial banks, which founded a special trust-fund in

January 1995 together with the central bank. For compensatingprovided expenses they reduced a normative of reserved requests.

Results. A complex of anti-crisis activities in Argentina providedstabilization of banking system in one year. Though during this periodposition of foreign banks were significantly strengthened. There share

in the total assets of banking system of the country drew up 42%.

The value. Expenses wasted on restructuring banking system of Argentina drew up 2.5-3.5% of the country WIP according to thevarious estimations.

Scandinavian countries. A complex of activities. notwithstandingdistinctions in the reasons provoking crisis in every Scandinavian


14/21

country, a conception of restructuring banking system leaned uponpractically united conditions and principles of state support. They are:

founding a special state organ for overcoming banking crisis andproviding state support avoiding mediator agencies;

strengthening the role of prudential banking management andseparating a special organ for its realization; overcoming deposits in relation with as physical, so juridical

persons with the method of joint approach (nobody looses); supporting every bank in equal principles and conditions and

fluent transparency of information for entire society; total method of estimating situation in banks and displaying

need of state support. This support a confluence with usage of not popular activities towards owners and managers, whichsupported them. These are such sanctions, as compensation of material loss at the expense of the property of guilty managers

of the bank, devaluation of nominal capital until loosing wholeresources (this activity in Norway was obligatory) and so on.

Programs of restructuring banking systems of these countries werebeing realized by optimal conformity of responsibilities and stimuli atevery level including owners, organs of managing separate banks andregulating organs of whole system.

A value. Expenses in Sweden consisted 4.3% of WIP and 9.9% - inFinland.

Hungary. A complex of activities. Restructuring banking system hasbeen continuing in two stages. At the first stage (1992-1995) the stateused to transfer important sum of money in problematic and, in thefirst place, large banks. At the same time clearing of bank assets in theway of changing bad credits at state bond took place. They usedstate guarantees very actively. They tried to use special structure forcentralized restructuring capital investment and development bankof Hungary, but by 1995 the banks appeared again under the criticalsituation.

At the second stage (1995-1997) method of approach in relation with

restructuring has been changed. They used state resources only forsupporting those large state banks, which were to be privatized.Restructuring made them attractive for western investors.

Results. State share in the bank capital after first stage has beenincreased from 41.4% in 1991 till 69% in 1994. The result of secondstage was increasing the share of foreign capital in the banking systemof the country till 60% by 1997 (in 1996 48%, in 199535%, in 1991-


15/21

1994 12-15%) and reduction of the share of state property till20.66%. Share of bad debts in total sum of debts by 1993-1997 hasbeen reduced from 13.2 till 1.2%. There was no occasion of sellingdeposits or refusing returning money to the debtors.

A value. Expenses provided at restructuring banking system of Hungary consisted from 12 till 18% of its WIP.

Estimating restructuring in Russia. Necessity of restructuring Russianbanking system has become evident in the middle of the 90s. Theybegan appropriate practical activities from August in 1998, which atthe beginning had an operative anti crisis character. Herewith, theypaid special attention in the first variant of restructuring program tothe saving of many-profiled (system forming), interregional banks,but later they decided to gather middle and small banks.

Operative anti-crisis activities. In 1998-1999 bank of Russia (centralbank) together with the government of the country provided operativeactivities for recovering ability of the bank, to be able to realize basiccomplex of service.

1.They provided three many-sided interbank clearing, which made itpossible to register 30 billion rubles for recovering taxation system. Inmany regions this gave opportunity to the banks to release from thecargo of nonpayment wholly or partially.

2.They decided to move obligation of numbers of banks towards

physical persons to the savings bank of Russia.

3.they used a mechanism of refinancing banks from September 1998for supporting bank liquidity: they granted Lombard credits to themore, then 80 banks, overnight to 34, one year credits to 15 onthem; they changed normative of obligatory reserves (total 5%normative). They gave banks right of regulating obligatory reserves.

4.Changes took place in the requests towards banks. Central bankpostponed usage of activities influencing in case of not consistingminimal normative of own capital of the banks for two years.

5.They involved special norms regulating activities of the selectedcircle of banks, in which there were: rule of calculating absolute sizesof economical normative, changing of calculating rules of somenormative, rule of influencing activities. this gave the banks damagedby the crisis, though having good perspectives opportunity for leaningupon the quantity of their capital owned by the banks till the first of August 1998, or changing currency course of Ruble while taking risks.


16/21

6.They reduced limit of open currency positions, strengthened rule of calculating liquidity normative.

7.They reduced 10 times registration of payment and size of the pricefor opening branch.

8.They changed prohibition for paying entering in the nominal capitalby foreign currency.

9.They involved requests towards registration of currency risks formedby balance-free operations and termed agreements. They managedactivities of credit organizations working on the consolidated basis.

They involved a rule of foreseeing bank risks in the banks.

10. They continued foreseeing licensing of those banks, whichabolished law, had not satisfying financial situation, and had no

perspectives of development.

At the same time, Bank of Russia and a government processed long-termed activities for solving basic problems of restructuring bankingsystem. We can separate following:

Participating in processing those legislative acts, which are necessaryfor success of restructuring banking system;

Working of executive government with the local organs for the purposeof defining their possible participation in normalizing banking activities

in the regions;

Participation in foundation of the Agency of restructuring bankingsystem (ARBS) and collaboration of central bank with it in the fields of restructuring separate banks;

Creation regime of prior support for restructuring banks.

For the purpose of widening possibilities of postponing own capital bythe banks:

They abolished prohibition on paying entering in the nominal capital of the banks and receiving subordination loans by the foreign capital;

They processed a rule of making entering in the nominal capital of thebanks, when it takes place at the expense of converting bankobligations in the licenses of participating in the nominal capital;


17/21

They changed methods of approach towards requests of minimal sizeof own capital. These requests are still active for newly founded banksand are abolished for the active ones;

The involved the rule of paying nominal capital of the banks by the

state securities.

By the end of 1999 Russian bank announced finishing of the first stageof restructuring banking system, which means, that this systemrecovered ability of providing basic complex of service, they keptviable kernel of the banks.

According to the Russian bank data, quantity of problematic banks bythe first of January 2000 has been reduced from 480 till 199, and bythe first of November till 155. They widened the scales of bankactivities, increased their assets. Whole capital of the active banks

(except saving banks) has been increased per 2.7, though its sizeconsisted only 46% towards the August of 1998, they reduced thenumber of those banks, normative of liquidity of which was less, thenthe obligatory level H3 per 70%.

The affair has been being interrupted by the absence of an evidenteconomical policy of the government. The bank of Russia had noconception of recovering and developing banks, which would bereceived by the totality of banks and finally state role and the place of central bank, instruments to be used in relation with commercialbanks, main goals and directions of working with restructuring. At the

way of restructuring lack of resources still remained to be the mainproblem.

Bank of Russia and ARBS estimated possibilities of forming quiteeffective instrument, which would give them possibility for organizing,managing and transformation of banking system, also,, theirpossibilities and readiness in the wealth of the resources of bankrefinancing and self-curing.

It is more dangerous, that bank of Russia considers liquidation of thebanks to be prior way of working with problematic banks.

Herewith, liquidation of the banks loosing license is processing veryslowly and is followed by large expense. To the mind of BankAssociation of Russia (BAR), restructuring process is continuing slowlyand not progressively. They consider, that bank of Russia has beenable to define banks to be supported, discuss the programs of theircuring and supporting realization of these programs. They have hadenough time for avoiding not viable banks, but they havent done that.


18/21

40% of credit organizations of banking system have lost their licenses,and only 3/5 of them have been rubbed out of the registration book.Middle term of liquidation procedures is 2-3 years. Herewith, almosthalf of competition mass is worked for organizing competitionmanagement and current expenses. Creditors of the banks in such

occasion loose their money forever. It seems that n case of liquidatingbank only those of the interested persons win, who provides theprocedure of liquidation and bankrupting.

Finally, it must be mentioned, that bank of Russia practically refusedproviding credit support to the banks for the purpose of providingstabilizing activities. The state refused to support practical programs of restructuring banking system as well. After these, the society suffersmore and more loss.

They often call a process of transforming banking system in Russia

slowly progressive restructuring. Truly, in fact it is brought to theindividual and spontaneous conformity of the banks to the newrequest of the time. This makes it dangerous, that this will recover onlyearlier banking system with the same weaknesses and defects.

Experience of overcoming banking crisis in the USA. US economy hasbeen influenced by banking problems several times. One of themappeared during the period of large depression of 1929-1933.

Thousand of bank deposits were devaluated because of ineffectiveoperations of the banks, also not returning of the granted loans andtotal degradation of the economy. They closed hundreds of banks and

provided confiscation of thousands of objects because of not returningof loans. US congress passed laws about founding federal corporationsinsuring deposits and also those insuring loans and savings. Exceptinsuring, these corporations were obliged to research a lot of financialinstitutions for the purpose of finding defects in bank legislation andprocedures and regulation of banking operations. This system hasbeen working effectively during many years.

By the end of 1970 and beginning of 1980 banking industry of the USAwas fluctuated by another financial catastrophe. To the analyticalmind, reason of this was defective practice of granting doubtful credits,

also, not transparency of the activities of regulating organs. Suchorgans that time were department of currency control, corporationsmentioned above and institutions of Federal Reserve System. Exactlythis time they destroyed reductions on percentage rates set for thebanks on the attracted resources. They gave the banks right to payany percents to the depositors (but higher, then market rates). Thatswhy rates in the 80s overcame annual 20%. It is evident, that the


19/21

banks were to grant credits in higher percents (25% and more) forkeeping profitableness.

Prices were being grown, especially those of immovable property(mostly because of expensive inner prices on oil). They abolished

reductions to the borrower-saving associations on realization financingventure projects related with immovable property and speculativecommercial operations (at whole US territory). Then they let thecommercial banks grant credits on reconstruction projects and otherrisky operations related with immovable property (the governmentstimulated such operations), as in the country, so abroad. Herewith, forguaranteeing such credits, banks attracted deposits with very highpercents. By the end of the 80s it was impossible to return such creditsbecause of high percents and side spread of speculative character of the borrowers operations. Scales of bankrupting companies andprivate persons in those years were extreme. Finally, values of oil and

immovable property have been significantly cheapened. Because of low level of banking management and under the conditions of deregulation reduced the number of hundreds of borrow-savingassociations and financing resources of commercial banks, that theystarted using deposits attracted by the higher rates for payments onthe old deposits and, they continued granting risky credits. By the endof 1988 both mentioned corporations were nearly bankrupted, as theywere to give all their resources to the not solvent banks andassociations in the way of insurance payment. The US congress was toprovide banking reform again.

Under such conditions the congress passed the law about reforming,recovering obligations of financial institutions and compulsory payment(FIRREA). This law signed in 1989 became the most fluent banking law,had ever being passed in the USA. For its realization and according toit they founded Trust Corporation of returning resources (RTC), whichhas following goals:

Liquidation of a lot of bankrupted borrow-saving association; Provision maximal returning of resources and minimizing loss of

the payers; Minimizing results of the crisis for immovable property and

financial markets; Providing cheap apartments for the people having low and

middle income.

The congress didnt pass those parts of the legislative act, whichforesaw financial support of the shareholders of problematic creditorganizations and thus didnt help massive restructuring of such


20/21

organizations. Thus, Credit Corporation started playing functions of liquidations department and not those of restructuring agency.

Restructuring separate banks of the USA was realized only inexceptional occasions and even if the share-holders were ready to

enter additional important resources into the capital and the creditorsagreed to find compromised solution of obligations related withdiscounting. Herewith, they were to like restructuring plan. Duringwhole history, they provided restructuring only of several banks in theUSA.

During the six year of existence, Trust Company managed andliquidated 747 not solvent borrow-saving corporations (40% of suchorganizations). A corporation, usually, was able to find firm and easilymanaged bank, which would oblige itself with obligations existed at thedeposits of the bankrupted organizations. According to the FIRREA law,

corporation used to give such banks cash or liquid assets of samevolume. When transition of deposits didnt take place in such banks,the corporation according to the corporation normative paid thedepositor guaranteed part of their deposits (not more, then 100 000dollars). Middle rest on the depository account in the bankruptedorganizations consisted 7500 dollars, total quantity of their depositorsovercame 25 million people. Total balance value of the shares of theseorganizations was 451 billion dollars. By the end of the activities of RTC, in December in 1995, 95% of these assets were sold per priceequal to the 87% of balance value, or the corporations was able toreturn 87 cents on every dollar.

RTC processed and involved special methods of marketing andrealization of bank assets, most of which have been used widely inother countries, they are:

Securitization of commercial loans united in pulls (emission of turnover securities by provision);

Wholesale of the rights of request on credit to the large marketcorporations;

Concluding open auctions in the regions; Organization of conducting open tenders on the federal level; Conducting auctions and tenders by participation of foreign

investors; Realization of immovable property by the scheme of financing

agreement; Creation data base of the objects of immovable property

managed by RTC (the base became available for the interestedbuyers allover the world).


21/21

RTC administration knew, that mission of this corporation would behard to be fulfilled, without having correctly planned strategy, strictlyprocessed methodology and procedures, also without strict control.

The most difficult problem was conforming conditions of selling assets,covering loans and restructuring, also stating responsibilities and limits

of wasting RTV resources.

They found way out by setting limits and wide distributing obligations. The procedures of transiting obligations to the staff workers foresawpreparing statement on every asset.

As a rule, main reason of banking problems is bad management.Inability of the setting good inner control and strict keeping of theprocedures finally brought the bank to the strengthening problems andbankrupting. Unprofessional management may give rise to themistakes in managing risks and liquidity. When these questions are

guaranteed by the managers and administration of the banks, this isfollowed by problematic assets and problematic banks. Exactly thistook place in the USA in 1970-80s. There were too many banks andthey granted huge credits, and this was absolutely incorrect. Weakorganization of selecting borrowers by the banks, entering of paymentsand controlling financial position of the borrowers and also weakmanagement showed up.

Lamara Qoqiauri

Working place: Tbilisi Iv. Javakhishvili State University

banking_restructuring article of adv acc

Documents